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RBA on the edge
Key takeaways
- July's inflation data suggest underlying price pressures remain stubborn, with services inflation accelerating and consumers continuing to spend despite higher prices.
- The strength of the monthly CPI data has reinforced the RBA's concerns, but seasonal factors and the short history of the series make it difficult to know how much signal the result contains.
- Next week's national accounts will help determine whether the economy is slowing enough to ease inflation pressures, or whether excess demand remains a problem.
This week saw the release of another month's inflation data for Australia. At first glance, the headline inflation outcome appears positive, with the annual rate falling from 3.8% in June to 3.5% in July. However, a closer look at the data reveals some concerning signs. Before getting into the detail, it is informative to frame the context of this inflation print.
The Australian economy began 2026 with inflation too high as a result of domestically generated pressures. The emergence of the Iran war and the spike in oil prices added to inflation risks, and in combination with domestic price pressures, saw the RBA hike the cash rate three times over the first half of 2026. Since then, the RBA has remained alert to signs that inflation pressures are strengthening. June quarter inflation data suggested only limited pass-through from higher oil prices, providing hope that monetary policy was sufficiently restrictive. Even so, the RBA reiterated that it was prepared to lift rates further if the upside risks to inflation materialised.
A concerning July print
Against this backdrop, the July CPI release has raised the risks that inflation will remain persistently elevated. Trimmed mean inflation provides a gauge of inflation when abstracting from volatile and large one-off moves in prices. In monthly terms, trimmed mean inflation lifted from 0.3% in June to 0.5% in July. This kept the annual rate at an elevated 3.6%, well above the RBA's target band. The drivers of higher inflation in July were relatively broad-based.
One key area of concern is market services given its links to domestic conditions and the tendency for the category's price rises to be more persistent. The July print saw many parts of the market services category show renewed inflationary momentum, including restaurant meals, hairdressers and various recreational services. The Fair Work Commission’s decision to lift award wages by 4.75% came into effect in July and likely contributed to the need for some service providers to raise their prices. However, businesses are only able to lift prices if consumers are willing to pay.
Businesses are only able to lift prices if consumers are willing to pay.
Consumers are yet to slow down
Household spending data also released this week indicated that consumers are yet to show signs of slowing down. Household spending rose by 1.1% in July after similarly strong prints in May and June and growth was spread across both essential and discretionary spending. The ABS noted that part of the lift reflected higher prices, however consumers absorbed the price rises rather than reducing the amount they purchase.
These data will have reinforced the RBA's concerns about underlying inflation. However, the July CPI result represents only one month's worth of inflation data. It is also a month that appears to be seasonally strong and the ABS does not yet have the data to fully seasonally adjust the monthly CPI. These seasonal issues are one of the reasons the RBA has tended to focus instead on the quarterly trimmed mean. Given the uncertainty over the signal from the monthly CPI data, the RBA will need to assess other information to determine whether the July inflation data are more signal or noise. Next week's national accounts will contribute to the central bank's view.
The RBA will need to assess other information to determine whether the July inflation data are more signal or noise.
What the national accounts might reveal
The national accounts provide the most comprehensive picture of the economy, bringing together information on households, businesses, government spending and trade flows. In the March quarter, economic growth slowed to a below trend rate of just 0.3%, half the rate it averaged in 2025. We expect the June quarter to show a similar rate of growth.
Common across both quarters in our forecast is resilient consumer spending, with households supported by robust balance sheets and ongoing labour income growth. Also common is a government sector providing less support to growth than in recent years. The main difference between the two quarters is the amount of support provided by data centres and mining exports. The June quarter will benefit from a recovery in weather-affected mining exports, however a temporary dip in data centre equipment spending will detract from growth. Regardless of the source, half a year of below-trend growth would normally be sufficient to start to alleviate capacity pressures.
However, the strength of this week's data provided little evidence that excess demand is actually falling. Consumers continue to spend, underlying inflation is too high and some domestically generated price pressures appear to be lifting, raising questions about whether monetary policy is sufficiently restrictive. On the other hand, the housing market is clearly slowing and the labour market has been gradually easing. Next week's national accounts will help to clarify whether the economy is slowing enough to bring inflation to target in a reasonable timeframe.